Understanding payment in lieu of holiday

Mark Birchall -

For most of us, the idea of not taking every day of annual leave we’re entitled to is absurd. But we all know someone who usually ends up with unused holiday days as the year draws to a close.

Out of those who don’t take all their holidays, some will have innocent reasons. Some might lose track of time or feel like they didn’t get a chance due to workload. Others might be holding out for a big December payday, banking on getting paid in lieu of holiday.

But the idea of giving holiday pay in lieu of actual time off is fraught with problems – not least of which the fact it means people aren’t taking enough time off throughout the year, and the benefits that come with it.

We’re here to talk through the problems with offering payment in lieu of holiday, and explain the best ways to deal with unused holiday allowance.

Annual leave rights

Full-time employees in the UK are entitled to a minimum of 28 days of statutory paid annual leave. This number is calculated based on the statutory minimum of 5.6 weeks of holiday entitlement (including Bank Holidays), which means if you work fewer hours, you get less time off.

For part-time workers on a fixed number of hours each week, calculating annual leave entitlement is as simple as multiplying their number of weekly working days by 5.6. That means someone who works three days a week is entitled to:

3 x 5.6 = 16.8 days’ holiday a year

Calculating holiday entitlement for casual workers (or those on zero hours contracts / irregular hours) is slightly more difficult. It involves getting an average of their working days over a 52-week period. You’d then use that average as the basis for what 5.6 weeks off actually means in terms of paid holiday.

Can you provide payment in lieu of holiday?

No matter how much statutory holiday entitlement someone has, The Working Time Regulations 1998 are clear that it ‘may not be replaced by a payment in lieu, except where the worker’s employment is terminated’.

Even if it seems like a good deal for both parties, allowing payment in lieu of holiday creates more problems than it solves. The most obvious downside is it’s an incentive to save a certain amount of holiday days. If someone would rather have the money than a day off, they’re likely to avoid taking their annual leave, even if they need it. This can result in burnout, which nobody benefits from.

The fact of the matter is statutory holiday allowance is designed specifically to give employees paid time away from their working environment to relax and recharge. Undermining the law by offering pay in lieu of holiday risks their health and wellbeing, as well as overall productivity.

It’s worth noting this only applies to statutory holiday allowance. For any holiday allowance you offer above and beyond the legally required 5.6 weeks, you can allow payment in lieu if you think it’s a good idea.

Can leftover holidays be carried forward?

The Working Time Regulations are quite clear on this too, saying annual leave ‘may only be taken in the leave year in respect of which it is due’.

However, this only applies to the 4 weeks of leave mandated by the EU Working Time Directive (which still applies after the UK left the European Union), and not the additional 1.6 weeks that make up the UK statutory allowance of 5.6 weeks, or any extra non-statutory annual leave you offer.

That means you’re well within your rights to allow 1.6 weeks’ worth of statutory leave to be carried forward into the next holiday year, as well as any holiday sitting outside of the statutory allowance.

Payment in lieu of holiday at the end of employment

The rules around payment in lieu of holiday are slightly different when someone’s employment is coming to an end. An employee’s final pay will include any accrued untaken holidays and any relevant extras (redundancy pay, etc).

To figure out how many days of holiday someone has accrued in the year before they leave, and therefore whether they’re entitled to any leftover holiday pay, you can use the following calculation:

(A x B) - C, where:

A is their holiday entitlement for the full year

B is the proportion of the year that’s gone by the time of leaving

C is the amount of leave already taken

It doesn’t matter whether their employment comes to an end because they quit, are made redundant, or are fired – everyone is entitled to any holiday pay they’ve accrued.

What to do if people don’t take annual leave

For the health and wellbeing of your team the best thing you can do is encourage them to take the paid leave they’re entitled to. That includes all types of appropriate time off like parental leave, sick leave, public holidays and so on. But primarily, we’re talking about their minimum holiday entitlement at least.

Here are some ways you can try:

  • Make it very clear to people joining the business what their holiday allowance is
  • Regularly communicate with everyone how much holiday they have left to take (every quarter, perhaps)
  • Check in with anyone who has large amounts of unused holiday to see if there’s a reason they’re not taking it
  • Make approving holiday requests easier by using an online staff leave planner
  • Implement incentives for taking holiday leave
  • Manage your workloads so nobody feels guilty about taking contractual holiday allowance during a busy period

We’ve recently launched Timetastic Pro which includes the unique Burnout Board. The Board helps shine a light on those not taking enough time off work for R&R, to help you identify who’s at risk, who might have a large number of days left, and who’s in danger of overworking. A well rested and fresh team is definitely your most successful team.